(N)egative (I)nterest (R)ate (P)olicy

Negative interest rate policy (NIRP) has arrived to the U.S. for large deposits at commercial banks. This is something we have already seen in Europe over the last few months and a sign (at least to me) that stress is again building. As of January 1st, bank capital will be classified differently making some large and very mobile deposits at large banks a potential liability and thus not profitable. This is being done because of the “mobility” of these deposits, the worry is the potential speed of flight capital if (when) it begins to run.

Let me explain what I mean by “stress” and you can decide which one fits the best if not a combination of “all of the above”. First, the real economies of the Western world are again slowing and in many cases declining again. Remember, this is happening even though fiscally, deficits are being run everywhere and monetarily, loose policy runs rampant. As the real economy continues to slow, “more power” is being screamed from the helm to the engine room. “More,” as in more debt, more liquidity and more of what created the problem in the first place. This explanation is fairly obvious.

Two other and less obvious explanations for NIRP are “velocity” and “making preparations.” Looking at velocity, it continues downward with no signs whatsoever of reversing. Money is being printed by the trillions but it’s not making it onto the streets. The money is piling up at banks who are hoarding the cash and making a “risk free” (really?) return by carrying the deposits at central banks. This works well for the banks and the central banks themselves …but not so much for the real economy as actual “flowing” money feels tight and scarce. As far as the real economy is concerned, credit policy is anything but loose.

The other aspect is that many large deposits (over the FDIC limits) are very “mobile”. By this I mean they can move quickly. So quickly in fact that back in 2008 there were “electronic” and overnight bank runs which no one saw …except the banks. Banks “borrow low and lend high,” this is how they earn profits. They traditionally borrowed via deposits and then turned around and lent these deposits out at a higher rate to earn a spread…banking 101 if you will. But 2008 exposed a flaw in this model, as soon as even the whiff of a rumor of weakness at a bank would arise, this “hot money” would move to safer ground. Whether this safer ground was another bank or even Treasury securities made no difference, the result was a bank(s) being left unfunded. Their capital ran away and they were left with too many loans and assets (impaired?) carried by not enough capital.

I know the above explanation was very simplistic, I did this so you could understand the “what or why” the Federal Reserve is changing the banking rules …they see something coming and are trying to prepare the system ahead of time. I believe they see another crisis dead ahead and are trying to position banks where they have less hot and mobile money in their funding’s.

The problems as I see it are several fold. The days leading up to Jan. 1st may see some hiccups if enough money does in fact move elsewhere. Also, if this scheme does “work,” money moves and actually begins to turn velocity around, hyperinflation could be a very real result. Fiat money is a very funny duck as it is strictly based on confidence, there is no way to tell at what point this confidence will turn once it starts to move.

The biggest problem as I see it could be a break in confidence, one which is caused by the perception of “something else is better”. If banks actually start to charge for holding balances, depositors will have to make some sort of decision. They can move to another institution which blesses them with either no interest or less negative interest. They can also buy Treasury securities or even stocks …or any other number of assets. This would initially levitate markets even more because of the flow …but what happens when some “leakage” starts? What happens when some depositors decide to buy “stuff,” any kind of stuff as a form of savings? What happens if included in this stuff are commodities and other monies such as gold and silver?

This then brings the actual currency into question. If you cannot earn interest on anything then the comparisons of apples to apples will begin. The question will arise, which is better, a $20 bill or 6 pounds of copper? Which would you prefer twelve $100 bills or one ounce of gold? Can a painting really be worth $100 million? What does this say about the value of $100 million? These questions are being asked every day, all day, all around the planet…but there will be a difference. The difference being, more money will be forced to make these decisions. “More money” because of the Fed’s January 1st edict!

I am not here to tell you that I understand all of the ramifications or fallout, I do not. What I do know is banking, the way it has been done even after morphing over the last 20 years is changing. With this change will come consequences, some seen…some not. The financial system has never been as leveraged as it is today, this is a fact. Another fact is, leverage “forces” the actions of participants in ways they would not prefer during crisis. Leverage will force some who would like to buy…to sell. Leverage will cause a solvent someone today into insolvency tomorrow morning. Not to pick on JP Morgan (though they more than deserve it), they hold some $70 trillion worth of derivatives, so does Deutsche Bank, does this qualify as “leverage?” When the next panic comes, we are now too leveraged systemically for the current system to survive, but I digress.

The grand scheme problem as I see it is the “push-pull” effect. The central banks need to push money out and into the system. This would aid the real economy and bolster “asset” prices. Their catch 22 is they cannot make the decision “which” assets are levitated in value because they do not control which direction the money they have pushed will go. Ideally, the money will stay within the box and continue playing with other paper assets. Once they bleed into real assets really gets going, it will be noticed and attract other attention …and into other real assets. They must create more money and more liquidity to keep the paper game going, it is exactly this debt and liquidity creation which will end up making the decision to flee …to safer assets. In the end, the definition of “safer” will be not only what counts but the exact cause of the crisis. The central banks are collectively trying as hard as they can to reflate, if they get their wish they will lose their currencies…pretty simple!

35 Comments

Don
on December 9, 2014 at 9:30 am

“Can a painting really be worth $100 million? What does this say about the value of $100 million?”

Bill, this says it all.

Bill Holter
on December 9, 2014 at 10:30 am

Thanks Don.

RD
on December 9, 2014 at 10:34 am

100 million yes but for what painting : if it is a Raphael’s painting it should Worth much more.

Indeed when the Louvre made the Joconde travelling some décades ago its insurance value was about 1 billion dollars (21th century dollars).

Bill Holter
on December 9, 2014 at 10:48 am

you are missing my point, “what is $1 worth”?

RD
on December 9, 2014 at 11:00 am

Nothing ! But it is normal that such painting would Worth a big quantity of other goods.

Bing
on December 9, 2014 at 9:37 am

Great “heads up”! According to your piece, the question we each need to ponder (and act on!!!) is, “If(when) enough money does in fact move ‘else where’….”, what is our personal “elsewhere”? Might be smart to start that process if we haven’t already begun. Never bad to be ahead of the curve, don’t you think?

Bill Holter
on December 9, 2014 at 10:31 am

agreed.

RD
on December 9, 2014 at 9:57 am

Big money deposits will mostly not flee to non monetary commodities but probably again to sovereign bonds because central banks will continue to load the trucks of these kind of products.
I see lower rates anywhere especially in the USA where they are much too high compared with europe and japan.
Even if farmland would triple, I do not see how it could lead to hyperinflation.

Some “liquidity” may indeed leak to gold (and silver) but how much and with what effects ???

Bill Holter
on December 9, 2014 at 10:32 am

rates are too high? Really? Maybe rates are too stupid low elsewhere?

RD
on December 9, 2014 at 10:37 am

I agree with you but nobody wants to stop the current system except some gold bugs including myself and for now : there are people working in a central bank with a printing press who say that they will buy every bond in the air : what the financiers are doing to try to “make money” : just buying them before…

The system will implode but in the meantime it means 10 years well below 0,5% and 30 years below 1% like in japan…

Bill Holter
on December 9, 2014 at 10:47 am

10 years? Could be 10 weeks or even days, they are losing control of so many things right now.

RD
on December 9, 2014 at 11:01 am

By 10 years I mean 10 years bond : I think that an implosion will happen before the end of this decade.

For the timing I am always wrong !

Bill Holter
on December 9, 2014 at 11:54 am

10-4

Matt R.
on December 9, 2014 at 11:56 am

S silver is having a great run today!

Bill Holter
on December 9, 2014 at 11:59 am

the bottom is in.

RD
on December 9, 2014 at 12:22 pm

I think the bottom will be in when the “US recovery” will have been dismissed in the west which is still not be the case.

Im sure it will be China’s fault when someone tries to hack it and cause a lack of confidence. ; )

Bill Holter
on December 9, 2014 at 1:18 pm

lots coming from many directions.

Bing
on December 9, 2014 at 1:32 pm

Showed this item to a friend who works as an investment counselor in local branch of a world wide banking operation. After review he commented, “Pure emotionalism-no hard data. I have complete faith in the banking community and US Treasury and Federal Reserve System.” He then started to net search for items about proposed Fed changes in banking regulations, negative interest plans in the US, and a variety of other related issues. I told him to reply to your Blog. He said, “Not on my bank computer terminal!” I told him I’d forward his concerns. He said, “I’d be shocked if (you) were to reply.” I assured him you would do so without fear. Oh- he has also been buying some silver along with me as I have been ordering over some past months. Hedging?

Bill Holter
on December 9, 2014 at 1:37 pm

thanks Bing, he sounds like a baby sheep who’s blinders were just taken off! I try to reply to everyone within reason. Maybe he should read my archives? Oh, and you might ask him if common sense can be considered “hard data”?

Bill is a joke!
on December 11, 2014 at 8:11 am

You are joking, right? Sensationalism and theater at it’s best here! Stir up the masses (if you can call the traffic “here” the masses) and refuse to use factual data to substantiate your claims? Can’t wait to see what other irrational garbage this website will produce!

January 1st is right around the corner, battening down the hatches and running for the hills, already, boys.

Bill Holter
on December 11, 2014 at 9:37 am

There are not negative interest rates? If there are, is this normal? Or even rational? Is your name even rational?

Chris
on December 9, 2014 at 2:51 pm

Hi Bill,

Thanks as always for a great post.

This is potentially a huge request. I am terrible at summarizing. I keep trying to explain events to my friends and family to no avail. You have a gift for cutting through the non-essential news, events and distractions to distill down to the truth. At some point, could you please write a “What Happened” post? When this all comes down and my family and friends are listening to all the cover-fire that the MSM will be laying down, saying “no one could have seen this coming” I’d love to have one link I could send them that explains at a high level what’s really been happening. In simple, straight-forward words. The Central Bank behind the scenes puppetry, Gold Suppression, Tarp, ZIRP (NIRP) and QE, PPT market management, suspension of mark-to-market, ponzi credit products and derivatives implosion, inflated GDP and massaged govt data like CPI. All of it. Is there a way to distill this down so that when we are sitting there on “the day after”, and they ask “What Happened?”, I could just say to them, “start by reading this, here’s the 10,000 foot view”. Maybe it’s not possible to simplify it, but if anyone could do it, I think you could. The PM community is already in debt to you as it is.

Bill Holter
on December 9, 2014 at 3:28 pm

thank you for such kind words Chris. This is a good idea, maybe I will write “The Day After” soon as a hypothetical, could be interesting? The GC has no debt to me whatsoever, it is my pleasure to write and had no idea I even could.

Theravaida
on December 9, 2014 at 8:50 pm

Chris, don’t send them any “links”. The internet would have been long killed by then. Or would have been “Tiananmen Square-ized” at a minimum. If Bill ever gets around to writing such an article, make sure to print it out and circulate paper (non-fiat!?! 😉 copies of printouts to your friends/family.

Bill Holter
on December 9, 2014 at 8:57 pm

I agree, besides, what good will an article do AFTER the fact? It would only serve as an “I told you so”. I will write a hypothetical in the next week or so, maybe it will be the one piece I write during Xmas week and New Year’s.

PIWolf
on December 9, 2014 at 4:04 pm

This is actually very good news, on several fronts:

1. Push people to keep their money in CASH, at home. Leave just a tiny amount to pay for bills, in the bank. This results in leaving banks with a lot less money to play with!

2. If everyone converts their extra cash from a bank account that now charges them fees, what hard assets would it go into? Maybe silver and gold? Ask the poor people – it is Gold! They don’t care about art or diamonds, they can’t afford it!

3. This will blow a big hole into the planned New World Order, which relies on purely electronic transactions to work. If everyone uses cash, all transactions will be untraceable.

Bill Holter
on December 9, 2014 at 4:11 pm

sort of…the banks are being funded with far more by the central banks than they are by deposits. Also, this is only for large (over FDIC limits) accounts, not daily spending accounts.

mahatma
on December 9, 2014 at 6:16 pm

ZIRP? No. NIRP? No. All these ‘policies’ are nothing more than FIRP. I suggest that we the people rise and see to it that all central bankers and their war mongering overlords swing from lamp posts and we the people take back our world. Take a deep breath. Can you smell it? That’s the smell of freedom.

You may have already pointed this out somewhere on a previous article. But if not, I surely would like your take. Here is what I see.

In today’s fiat world somebody will always be left holding dollars. I can see no way for everyone to get rid of their dollars. If I sell you a painting / gold / farm land, whatever – you have gotten out of dollars and into something real. On the other hand I am now stuck with dollars. And if I buy something of value, gold, etc, from a third party I get out of dollars but that person is now stuck with dollars. See what I mean – someone, somewhere, at all times is stuck with dollars because they cannot all be redeemed. However, when we were on a gold standard where our paper dollars were printed by the US Treasury everyone could get out of dollars and into gold/silver, etc. Why. Because everyone at anytime could walk into a bank and trade their paper dollars for gold or silver. Today, there is not one single bank that will take that trade – paper dollars for gold/silver. So again, unless I am missing something, someone will always be stuck holding US dollars – and lots of them. Every trade has two sides – it is a zero sum game?

Bill Holter
on December 9, 2014 at 7:15 pm

yes Bob you are correct. It’s called a game of hot potato which ends in a worthless currency and will be seen as hyperinflation. The deflation argument won’t work because the dollar dies when debt does.

Jarret
on December 10, 2014 at 9:21 pm

hot potato is a good analogy, the seller of the real asset still winds up with a deposit at the bank. Seems to me an easy way for banks to double dip, make an interest on assets and amortize liabilities.

Bill Holter
on December 11, 2014 at 6:42 am

…and bail in your balances.

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